AirAsia goes naked on fuel hedging

AirAsia has taken a one-off charge of RM426 million ($115 million) in its fourth quarter to get completely out of fuel hedges going forward.

“We’ve taken all the hedges out,” group chief executive Tony Fernandes told analysts in a conference call last week. All of its fuel needs from now will be paid for at spot market prices.

The one-off hit is large, but unwinding its hedges means “we won’t have a noose around our necks going forward over this year”, says Fernandes. Over a period of 2-3 years AirAsia was at risk of paying three times the price of the hedges if it hadn’t taken this action, he explains.

As it “rides the market” on fuel this year, the airline is looking at returning to some hedging in 2010 and 2011. “But they will be clean vanilla swaps and we’ll pay cash for them,” says Fernandes.

“We believe this is a prudent approach as its shields the group from the burden of mark to market, frees up equity and protect our cashflow,” says the carrier. However the total impact of the charges meant AirAsia fell to a net loss for the quarter of RM177 million.

AirAsia is close to a “much more cost-effective deal” with Kuala LumpurInternationalAirport, which includes resolving old disputes between the carrier and the airport operator, says Fernandes. “The cost of operating in KLIA will come down (for AirAsia).” The airline will remain at the airport at the government’s request and not move out as it had threatened.

Commenting on the signing of a deal last week with Barclays Capital in London to finance 13 Airbus A320s, Fernandes said the commercial terms of the deal were “not far away” from those it had previously signed for narrowbody airliner finance. “There is not a huge additional [financing] cost,” he says.

The Airbus financing deal was “something to shout about” for AirAsia, says Fernandes. “Most airlines are struggling to find finance,” he notes, and the fact that AirAsia has succeeded demonstrates the strength of its business model.

As Ryanair has recently announced, AirAsia too plans to get rid of all check-in desks. “This is our eventual aim,” says Fernandes.

AirAsia is busy adding routes in Singapore and in Indonesia as those markets open up and demand has been strong. Just days after opening its Singapore to Jakarta and Bali routes the airline has sold 30% and 22% of its seats in these markets for the coming three months, says Fernandes.

AirAsia is forecasting it will carry 22 million passengers in 2009, with Fernandes personally expecting the number to be higher.